Section 179 vs. Section 179D: Understanding the Differences

Businesses and building owners have probably heard about Section 179 and Section 179D.

Section 179 is a general expensing provision for tangible business property, whereas Section 179D focuses on energy-efficient building infrastructure.

What is Section 179?

Section 179 property includes various types of tangible personal property as well as certain qualified real property improvements. The property must be acquired by purchase for use in the taxpayer’s active trade or business.

Key items to consider:

• Allows selective expensing, meaning you can choose which assets to expense
• Applies to both new and used properties
• Includes certain qualified real property improvements, including roofs, HVAC, fire protection, and security systems

The new tax bill increased the Section 179 deduction limit to $2.5 million, with a phase-out threshold starting at $4 million. These amounts will be indexed for inflation starting in 2026. The deduction cannot exceed the taxpayer’s aggregate taxable income

What is Section 179D – Energy Efficient Commercial Buildings Deduction?

The Inflation Reduction Act enhanced this deduction, which incentivizes both building owners and designers of public or nonprofit buildings, including architects, engineers, or contractors.

Key items include:

• Deduction applies to HVAC, lighting, and building envelope costs.
• Energy models are required to demonstrate energy cost savings relative to an ASHRAE 90.1 baseline.
• Deductions can be taken in an open tax year for designers for tax-exempt entities, or in the current year tax return for privately owned buildings.

To claim Section 179D, you must reduce the tax basis of the building by the amount of the deduction. This prevents you from later depreciating those same costs through standard methods.

How do 179 and 179D Compare?

How to Maximize 179 and 179D with Cost Segregation

You cannot "double dip" by claiming both deductions for the same dollar of expense, but you can strategically divide a renovation or construction project through a cost segregation study.

Here’s what you need to consider:

• Cost segregation, Section 179D, and Section 179 are not mutually exclusive strategies.
• Cost segregation will identify and componentize the applicable assets to segregate shorter-life property. This process also supports Section 179 and the Section 179D analysis by properly isolating assets subject to the 179D basis reduction and ensuring accurate treatment across both incentives.
• Section 179D will analyze "permanent building systems" that improve energy efficiency, specifically interior lighting, HVAC, and the building envelope.
• Section 179: Assuming 100% bonus depreciation is available, Section 179 can be applied first to assets that are not eligible for bonus depreciation – such as roofs and certain HVAC components. Bonus depreciation would then be applied to the remaining bonus-eligible assets.
  • By structuring it this way, you avoid exceeding the Section 179 limits while still leveraging the 100% bonus depreciation from the cost segregation study.

Strategic Planning for 2026

The One Big Beautiful Bill (OBBB) introduced significant changes for the 2026 tax year:

• Section 179 Limits:
  For 2026, the maximum deduction is $2,560,000, with a phase-out starting at $4,090,000.
• Section 179D Sunset:
  This deduction is scheduled to expire for any project where construction begins after June 30, 2026.
• Bonus Depreciation:
  The OBBBA restored 100% bonus depreciation for 2026, which can be combined with Section 179 to further accelerate write-offs on equipment and tangible personal property that exceeds Section 179 limits.

Therefore, if you renovate an office building before June 30, 2026, you could maximize savings by:

1. Performing a cost segregation analysis to componentize lower-life property and real property.
2. Claiming Section 179D for a new high-efficiency HVAC system and LED lighting.
3. Claiming Section 179 for new desks, servers, security equipment, remaining HVAC basis, and an updated fire protection system.
4. Applying 100% Bonus Depreciation to any lower life property that exceeds your $2.56 million Section 179 limit.

We Can Help You

If you or your clients have upcoming commercial or residential construction projects, we can help you develop a plan to maximize these incentives while they are still available.